New Round of Open Skies Negotiations Set to Begin Between Europe and America

TWO years after the end of the first world war, America passed the Jones Act. This restricted the shipping of goods between home ports to American-owned vessels. The war had convinced lawmakers of the need to foster a home-grown fleet for use in times of conflict or national emergency. In 1944, while a more modern war still raged in Europe, governments meeting in Chicago took inspiration from the Jones Act while laying down the regulations that would govern international air transport. These were crafted to safeguard the vital strategic role of each country's “flag carrying” national airline.

On Monday November 14th, a new round of “open skies” negotiations is set to begin between Europe and America. This is the latest in a series of attempts in recent years to unpick the anti-competitive measures that were put in place in Chicago. For decades, arcane rules on routes and frequencies have distorted the market for aviation. And restrictions on foreign ownership of airlines, in the name of national security, have prevented the competition that has preserved the vitality of other industries.

Airlines have traditionally sucked up government money and disappointed investors. And now many of America's leading carriers are dependent on Chapter 11 bankruptcy protection, while many of Europe's flag carriers do little better than break even. But as passenger numbers have increased over the years, a few, such as British Airways (BA), have made handy profits since their release from state control. And a whole squadron of low-cost airlines is prospering, despite the industry's regulatory thicket.

Economist.com via NewsEdge Corporation :

At a domestic level, both America and Europe have already relaxed their grip. America began the process of liberalisation in 1978, opening up the market for flights within the country. New, low-cost airlines flying passengers at rates set by the market proliferated. Europe had to wait until 1997 for deregulation. The results were similar: a plethora of low-cost airlines began flying customers cheaply all over the European Union (EU). At last count, Europe boosted some 50 no-frills airlines.

America's commitment to more flexible flying also extends to a series of bilateral deals with some European countries and a host of other destinations. America now has arrangements with 72 countries. These allow its carriers to fly from anywhere in the United States to destinations in the other country in return for allowing that country's carriers direct flights to more American airports. And big European carriers have been permitted to forge close flight- and revenue-pooling alliances with American partners.

As a result of this creeping liberalisation, airlines have been able to carry passengers more efficiently, which has brought down fares. So many may wonder why the negotiators meeting next week do not immediately throw transatlantic skies open to the full forces of competition. After all, the European Commission, the EU's Brussels-based executive, estimates that full liberalisation could boost transatlantic passenger numbers by up to 11m a year, a 24% increase on routes that currently generate annual revenues of $18 billion.

After a court ruling in 2002, the European Commission wrested negotiating rights on aviation from the EU's individual member states, raising hopes that efforts at liberalisation would gather pace and that the collection of bilateral deals between member states and America would give way to a more comprehensive opening of the skies over the Atlantic. Direct talks between Brussels and Washington began soon after the commission won negotiating power but broke down last June, largely because of British opposition.

Rights and wrongs

Much disagreement centres on landing rights. Mergers among Europe's airlines have been stymied by the rights enjoyed—and jealously guarded—by flag carriers at their national airports. These are governed by bilateral deals and determine which airline can fly to where. The merger between Air France and KLM, concluded in 2004, was structured in such a way that the Dutch flag carrier retained landing rights negotiated with America. BA's attempt to link up with KLM in 2000 foundered over the issue of landing rights (which America had threatened to cancel at some of its airports if a deal went ahead). The Americans may be prepared to give some ground on landing rights in the upcoming talks, but they will want something in return.

America has long harboured ambitions to open London's Heathrow airport to more of its airlines, the subject of an acrimonious 30-year dispute between London and Washington. Only four airlines from Britain and America—BA, Virgin Atlantic, American Airlines and United—may currently run transatlantic flights from this important European hub. BA and Virgin fear that they will lose this valuable perk without gaining much in return from America. A full-blooded alliance between BA and American was blocked in 2002 after American regulators demanded that they give up some slots at Heathrow.

Britain is likely to do what it can to block a deal that sharply curtails the privileges enjoyed by its airlines at Heathrow. A possible compromise could see the airport opened to other airlines for transatlantic travel. But if the incumbents are allowed to keep the slots they already have at an airport already too crowded to permit further flights, those changes will prove little more than symbolic.

America's struggling carriers could do with the boost to business that increased transatlantic travel would bring, and an injection of foreign capital would do them no harm

A further, more fundamental impediment to full liberalisation is that it would require America to lift the foreign-ownership rules that apply to its airlines—overseas investors may not command more than 25% of the voting rights. These restrictions (along with the matter of landing rights) have prevented large and successful airlines (such as BA) from making cross-border acquisitions that could bring economies of scale. They have also starved America's struggling airlines of foreign capital.

As a trade matter, the ownership rules can be altered only with the approval of Congress. And American politicians are in no mood to contemplate the loss of prestige, or the perceived security threat, which would result from the foreign takeover of a leading American carrier. Some in Congress also worry that, given the travails of America's airlines of late, foreign bidders would be able to pick them up at low prices.

As a gesture before next week's meeting, the Bush administration recently promised to relax the rules on foreign ownership as far as it can without Congress's approval: it will countenance a foreign chief executive or other top managers for an American airline, and hence a measure of foreign control. But this is a small concession, and ownership regulations are not even set to figure in the discussions in Washington.

Given the persistent difficulties over the foreign ownership of airlines, fully open skies would seem to be a long way over the horizon. America's struggling carriers could do with the boost to business that increased transatlantic travel would bring, and an injection of foreign capital would do them no harm. And don't forget consumers, as negotiators so often seem to; they would surely benefit from increased competition on routes between the world's two largest aviation markets. If no substantial deal is reached, airlines and passengers will remain in thrall to a system predicated on the strategic considerations of the 1940s.

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